In focus

Is it time to head back to frontier?

Frontier markets feature some of the most exciting investment opportunities globally. However, interest in these markets has waned in recent years.

Having been promoted as a high growth, high return asset class, frontier equity market returns have on average disappointed over the last decade. Meanwhile, there has also been a major evolution in the frontier investment universe.

Ten years ago, frontier equity investing was dominated by Middle Eastern, oil price-sensitive markets. Today, many of these have graduated to emerging markets, allowing the investment opportunity set to become more balanced.

Importantly, export-led manufacturing economies now represent a greater share in major frontier market indices. Allied to this is the fact that many frontier investors also expand their investment parameters to smaller, less developed emerging markets, which offer similar investment characteristics.

After some years in the investment wilderness, we think the future is brighter for frontier markets.

What are the long-term factors which support growth in frontier markets?

Frontier emerging markets enjoy a number of competitive advantages, with several countries benefiting from combinations of low labour costs, young populations and/or rich natural resources, as shown below:


As a group, frontier emerging markets are not small. The total population of these markets is close to a billion people, equivalent to almost 15% of the global total. Their aggregate GDP is about one-eighth that of emerging markets, and one-twentieth of total global GDP, but their capital markets are under-represented. The stock market capitalisation of frontier emerging markets is just one hundredth that of emerging markets.

Over time, we expect both these ratios to increase. Most of the markets that we invest in are nascent economies that have been growing at 5%+ per annum. A relatively low base of financial inclusion points towards the sustainability of these rates for an extended period of time.

Advancements in connectivity and innovative fintech solutions are fast-tracking financial inclusion in many frontier emerging countries. Digitisation of government services and a push towards cashless societies are helping to formalise what are typically sizeable parallel economies.

How have frontier markets been impacted by Covid-19?

Some frontier emerging markets were severely affected by the Covid-19 pandemic. As they recover, we believe that their long-term domestic drivers will be in the front seat again and that GDP growth will return to 5-7% across the board.

Covid has further highlighted the need for many of these countries to liberalise, attract foreign direct investment (FDI) and expand their export bases. Over the long run, this will make them more self-sufficient, increase their resilience against global shocks and in some cases reduce their dependency on tourism.

Expansion in capital markets will play a key role in the economic development of the frontier emerging countries, providing them with deeper and more sustainable sources of funding. As a result, we believe that the asset class offers the prospect of attractive financial returns.

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